Incentives a key way to boost pension scheme investment in UK growth

Joe Dabrowski says a radical market reshape would risk unintended consequences

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Joe Dabrowski: The PLSA proposals build on current government initiatives and address the needs of the pensions landscape as it is now
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Joe Dabrowski: The PLSA proposals build on current government initiatives and address the needs of the pensions landscape as it is now

In the Pensions and Lifetime Savings Association’s (PLSA’s) regular column for Professional Pensions, the trade body’s deputy director of policy looks at the role of pension funds in driving growth in the UK economy.

At the beginning of this month, the PLSA hosted some 800 pension and investment professionals in Edinburgh for our annual Investment Conference.

Over two and half days, we heard from more than 100 speakers across 42 different sessions, covering topics as wide ranging as investing for a less carbon intensive future, liability-driven investment, post-retirement products and driving better value for money.

But the liveliest debate - and the one that had dominated the headlines in the run-up to the conference - was about pension funds' role in driving growth in the UK economy.

Today, UK pension funds invest almost £1trn in the UK through a mixture of UK shares, corporate bonds, government debt, and other asset classes. This investment generates the capital that businesses need to expand their operations, hire more employees and develop new products and services. It also supports spending on infrastructure, renewable energy and social programmes.

However, over recent months there have been many public calls, from government, stakeholders and the media, for pension funds to play a bigger role in providing additional capital to support growth in the UK economy, especially through increased direct investment in infrastructure, private markets and venture capital. 

Many commentators have suggested that the best way of achieving additional investment in UK growth assets is by undertaking radical and rapid consolidation of the pensions sector. We do not disagree that scale can have many advantages but, in our assessment, there are many quicker and simpler ways of achieving these objectives.

Initiatives to support pension fund investment in UK growth

In a paper, Pensions and Growth, the PLSA has identified a dozen opportunities to encourage all types of pension fund to invest further in UK growth.

Importantly, these measures do not inhibit pension schemes' ability to direct the investment of their members private savings, and do not dilute their fiduciary duty to scheme members.

Chief among them is establishing a rich, and continuous pipeline of enterprises needing investment for providers to bring to market and investors to choose from.

The asset management industry should be encouraged to focus on sourcing UK opportunities and developing new investment funds and products, such as long-term asset funds (LTAFs), which are appropriate to pension fund needs. The British Business Bank could also be given an extended scope to support companies that need scale up capital, and to create or partner with funds that can bundle up the assets in a form that would be suitable for pension funds.

Initiatives like the Long-term Investment for Technology and Science (LIFTS), which alter the risk-return component of an investment, are appealing to pension funds provided that the financial support from government is of a long-term nature. Enhancing the tax treatment of domestic investments, as they do in France and Australia, also merits exploration.

We also want to see the government press ahead with its very welcome plan to increase auto-enrolment (AE) contributions by removing the lower earnings limit and by starting AE at age 18 instead of 22. Only by increasing the flow of new assets into defined contribution (DC) pensions can we hope to provide more capital, and better retirement incomes, in the future. The government should also consider further increases in contribution levels from 8% to 12% over the next decade.

Arguably the most important thing the PLSA is asking of the government is policy certainty. Setting out a clear plan for the future of the UK economy, for example on the Green Transition, will help draw pension fund investment and allow the UK to compete with non-domestic assets.

Pension funds play an essential role in supporting the UK economy. The UK has one of the most sophisticated and mature pensions systems in the world - it is a great British success story, that provides security to tens of millions of savers.

How pension funds can play a bigger role in providing capital to support growth in the UK economy is an important question, and in our discussions with schemes there is a clear appetite to invest in the UK - where it is in the interests of savers.

Our proposals build on current government initiatives and address the needs of the pensions landscape as it is now. We risk unintended consequences by trying to radically reshape the market or water down the fiduciary duty that is fundamental to our system.

Joe Dabrowski is deputy director of policy at the Pensions and Lifetime Savings Association

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